Monday, March 2, 2015

The Full Cost

There are negative externalities in our marketplace. Things that have a hidden-but-real cost, which aren't fully factored into the price of the items we buy. The environmental damage caused by shipping all the stuff we love from Amazon isn't exactly factored into the low, low price. I, as the purchaser, do ultimately pay for the raw materials, the labor for creating the goods, the customs, the insurance, the companies' profit, and the bill from the shipper itself. But the long-term costs from the pollution spewed out of gigantic freighters carrying the containers overseas, or that of the diesel and UPS trucks bringing it right to my door, a whole bunch of people end up paying for that...with their lungs.
Similarly, an investment banker who, say, creates and sells mortgage backed securities that are likely to fail, doesn't personally absorb all the costs or damages associated with that investment product. The dude gets his bonuses long before the poo hits the fan, and a lot of other guys feel the pain down the road.

And then there are the real cost of cigarettes, which we all get to share in via insurance premiums.

This is a type of market failure. The market doesn't always pass on the total costs of goods to buyers and sellers, and a third party sometimes ends up bearing them. Like when a bunch of vegetarians pay higher health insurance premiums due to chubby meat-eaters' over consumption of Big Macs...that is not included in the $3.99 price tag.

And while this sort of economic trivia is fun to think about on the pages of a weird Arizona blogger, you have to ask: what's the point? So there are costs that avoid the purchaser and hit someone else. What good does that do me, and what can I do about it?

How do you apply a concept that, by definition, is about someone else making a payment or getting a benefit?

Estimate the Full Costs
Knowing that the market will often fail to illustrate the full costs of any product, our next best step is to try to build them into our analysis. When I'm looking at the bag of $2.99 Kettle Chips in their delicious glory, I can tell myself that they also cost me about five hours of running if I eat the whole bag. (And who am I kidding? I will.) If I don't run for five hours, I can build in the cost of gaining about a pound and a half, if I make the chips a habit. (And who am I kidding? I will.)

But this is a poor example of an externality, since I still bear the costs as a consumer. What if my purchases hurt someone else?

How about that sweater I bought this past fall? Might I do well to estimate that some guy or gal suffered in a cramped, unventilated room for twenty minutes, stitching the thing together? If I bothered to put a price on that suffering, maybe fifty or a hundred or a thousand dollars, would that change my purchasing behavior?

These are finger-in-the-air estimates, and not accurate at all. But the exercise of estimating secondary costs at least gets me thinking of what we, collectively, pay for in the long run for my purchases.

I'll always be a consumer, of course. I'm no homesteader, and being the specialized worker that I am, will have to buy the things I need, and want, from others. But my consumerism can't keep just being about getting the things I want, forever and ever, Amen.

Like the therapists say, acknowledging the problem is the first step.

Hi, my name is Mr. Done by Forty, and I hurt people with my purchases. Thanks for listening.

44 comments:

Real talk. Not many out there with the gumption or courage to point it out to everyone. It's easy to forget. Is the answer then to mitigate some of those external costs by purchasing more locally-sourced goods of all kinds? Perhaps trying to buy only used items of clothing and furniture? At the end of the day, we also have to remember that a portion of every dollar we spend in the US also goes to funding wars both at home an abroad. It's almost impossible to escape the external costs, as you said, but better to remember them than remain ignorant. I'll be thinking twice about that next amazon purchase for sure. Cheers.

As you know, I have a conflicted relationship with the buy-local movement. I think geographic bias has its own pitfalls. (For example, we pour more water on plants to grow crops and cattle in AZ than farmers do in other parts of the nation.)

But it's undeniable that you can keep a better eye on the supply chain when it's only ten miles long. I can see the farm. I can talk to the people making my sweater.

It's time for me to re-think my position on the local-first initiative.

You're so right about the food. Definitely. But I'm talking about many other services. People going to a locally owned pet store for food and toys instead of Petsmart, or to a local hardware store (even ACE Hardware stores are locally owner-operated) can make a huge difference in how your money is used after you've spent it - keeping more dollars local overall, and supporting your neighbors instead of corporate offices in other states. Just my thoughts.

What if you thought about it in a way where the money is magnified throughout your community? So by buying from that local business owner he is then sending money to local taxes and likely spending the excess in the community as well

That synergy is not unique to interactions that happen within a single, local community. Greater synergies are possible between communities -- certainly between those that don't share the same 7% sales tax revenue.

There are several pitfalls in focusing on place (which is really all the buy local movement is: a focus on hyper-local purchasing). Like Jim Russell says, people develop, not places:

Hey Kayla. Thanks for commenting on a tricky post. The simple decision to not buy solves a lot of the problems.

The typical refrain against frugality is that, if everyone stopped buying things at the level we currently do, then the economy would grind to a halt. I doubt the impacts would be that far reaching. Not buying things has, if we take the holistic view, a net positive impact.

I've been thinking a lot about issues like this. The whole "woe to the economy" counter-argument is false. Even if the consequences are big enough to damage it...maybe it should be damaged? To use the term from the book "Radical Homemakers", our current economy is extractive - it exists to extract value to center it in corporations. If exploitation and environmental damage happens, well, that's just the cost of business. The author of that book proposes an alternative economy she calls the "life-serving economy", where things are evaluated in terms of family, community, social justice, and ecological health. It's a very interesting read even if you aren't a homesteader type.

My best personal example of decisions I've made after analyzing full cost is to stop buying bananas. Maybe organic bananas are better, but conventional bananas have a huge externalized cost to the countries in which they are produced.

Very cool to see another PF blogger writing about this. I've been writing a lot on similar topics ever since I read "Animal, Vegetable, Miracle" and decided homesteading was my long-term goal. I'm going to link this on my MMM forum journal as well. Hopefully it sends some traffic your way ;)

Thanks for the thoughtful comment, Goblin Chief. And double thanks for linking this over at MMM. That guy has a huge footprint and does a ton of good for the world's finances. I'm proud to admit he was the guy who 'turned the light on' for my wife and me. Any mention over there would be much appreciated.

I'll check out our library's stacks to see if that book is available. Extractive is a cool concept, and one that perfectly describes how we consumers approach most problems.

As I read your post, I remembered a very cheap jumper (sweater) I bought before Christmas at a nationwide clothes retailer here in the UK. I'm afraid to say that it was probably made under conditions that you mentioned above. I didn't give much thought at the time to the real cost involved and like MSquared says above, it's easy to forget. Thanks for this important reminder.

I'd bet most of the stuff in my closet fits that bill, Hayley. We're not alone.

A lot of the stuff we use, including the computer & phone I'm typing these comments out on, likely involved some human suffering. I doubt there's a whole lot to do about it at this point, except to be aware of it and let it influence future buying decisions.

If I make this computer last another 5 years instead of buying another, maybe that's a good outcome.

It's just so easy to forget these impacts we have on the world! Your Kettle Chips example is interesting, because you're inflicting an externality on your future self, often without really considering the possible impact. And if we do this with ourselves, what chance do most people have of considering the impacts on others that they'll probably never meet, in some distant country? It's certainly something to aspire to as humans, but collectively we have a very long way to go. Great posts like this help acknowledge the issue and bring us ever so incrementally closer.

You could also relate this to people who are terrible with finances, and just buy whatever they feel like today, and don't ever think about the externalities they inflict on their poor future self, in the form of less money and freedom. Easy for most of us who understand money and it's impact on the future, but so many people probably don't see or understand this externality.

I sometimes don't think about everything that goes into what I'm purchasing. Thanks for making me feel guilty. lol! But you bring up a good point about consumerism in general. There is more than meets the eye.

Well... I could write a novel on this topic - OK, maybe an essay - but seriously the whole globalized economy thing is a huge area to tackle. I think that while trying to "buy local" is a good idea in principle, the reality is that since so little is actually produced in America these days, it's virtually impossible to do so in a meaningful way - especially if you're talking about anything beyond food. Seriously, is there really a meaningful difference between buying something made in China online vs. driving across town to purchase it "locally?" That's splitting some pretty fine hairs in my opinion.

So I try to buy used where possible, and just buy less stuff in general. But as with many similar issues, if we want to have a meaningful impact, we need to work to fix the trade agreements that have gotten us into this situation in the first place - and that means becoming politically active - or at the very least voting for candidates who will support better wages and working conditions for overseas manufacturers.

Excellent point about the specious argument of buying local. I'm especially sensitive to the slightly xenophobic, "us first" strain that runs through the buy local, buy American arguments. In my opinion, geography's often a poor means of determining who should benefit. Still, the approach is not without its merits.

Buy used is a far better idea for a movement. Our house is an odd mishmash of Craigslist purchases.

I honestly have not heard about improving wages of foreign workers much in politics. (Though I'll admit that I'm not particularly active.)

Thank you for making me think, and feel guilty.... ;). This is a tension that I struggle with in our desire for optimal frugality. Often frugality does correlate with environmental/societal benefits (i.e. riding one's bike, not using harsh chemicals in the home, etc). But, sometimes it doesn't--as in the case of buying cheap stuff from Amazon, Costco and the like.

One way I assuage my guilt is by not buying a lot to begin with. And when I do buy, I buy used as much as possible. Our furniture, clothes, car, dog, kitchen stuff--all used. I feel like that lessens the external impact by keeping this stuff from a landfill, but I do realize it's not a perfect solution. And, I obviously don't buy everything used (hello, toilet paper).

When I read this, I couldn't help but think about how those workers in horrible situations, at least they are getting SOME money to help feed their families instead of 'NONE" money. This is such a complex issue all the way around, and it starts and ends with greed. Not saying every purchaser of "stuff" is greedy, but greed is riddled throughout the decisions of so many - these decisions that affect our world. This is one of the reasons I love homesteading. Each homesteader's goal is to care for themselves as independently as they can, not necessarily so they can say "screw you" to society, but moreso so they don't place any added burden on society. I think often in this respect about the "olden days", when everyone grew their own food, made their own clothes, chopped their own wood (often times partnering with nearby neighbors in these things). The local store was for material for sewing and spices like sugar, flour, etc. People would occasionally gather at the local hotel restaurant for a meal out. Everyone worked the land they needed to work, and all was "weller" in the world. Advancement and technology most certainly have their benefits, but it seems to me that much of the human race has come from an attitude of servanthood to an attitude of "serve me" because of it. Another wonderful post, my friend.

I was hoping you'd write! The homesteader line was written with you in mind, as you guys are taking a very different approach to addressing the burden purchases put on others.

Your point about giving the workers some money rather than none is the crux of the issue. In most cases, we can assume the workers are voluntarily (perhaps happily) working that job.

My take is that the consumer is the driver of the conditions. When we demand very low priced goods, we get correlating working conditions and/or locations. If we demand, broadly, only certain types of other goods (ethically produced/sourced) then the market will likely follow suit.

I fall off the wayside for this post. In most of the cases you mention that's just how the world works. Need a package sent, yep you get some pollution with the trucks, other option walk to find whatever item you need/want and purchase. If that's your thing then great good for you. While I think everyone should give best efforts to treat the world right, it will not stop me from buying a shirt from Nike or a Shamrock shake from McDonald's. I'm not buying the "save the world" mutual fund either, once again I just think that's how the world works.

Negative externalities definitely have real costs (part of the idea of a carbon tax is to force us to start paying for them more directly). But in most cases it's so hard to quantify them that it becomes more a matter of making decisions that feel better after considering as many unexpected costs and consequences of your actions as possible without driving yourself absolutely crazy. For us, most of the time it comes down to BIFL-ing most purchases, which at least limits future negative externalities from purchasing a replacement down the road. And we also try to vote with our dollars by purchasing things like groceries only at stores that provide fair wages and benefits to their employees and buying bike parts at stores that benefit our local (and internet) cycling community even though we might be able to find them slightly cheaper elsewhere. It's not perfect, but driving myself mad with guilt all the time would have a negative externality to Mr PoP, so we need to find our balance somewhere. =/

This hits close to home. I live in Iowa where we just passed a gas tax hike, which was much needed in my opinion. Counties are tapped out of funds for infrastructure improvements. Bridges and overpasses in my county are on "watch lists." And the only paved road to my area of town (I live in a town with bluffs and valleys) is crumbling. The gas tax in Iowa hasn't been increased in 26 years. Now some are upset because -- well -- it hurts to spend money. But it hurts not to. If we had not externalized these costs and kept kicking the can down the road we wouldn't be in this predicament. Iowans, in particular, have become accustomed to fairly cheap gas. The cheapest? No. But on par and compared to neighboring states we're cheaper due to ethanol subsidies (not a debate I want to start here). They say that if we all paid the TRUE costs of a gallon of gas it would be close to $7. Then, maybe we'd modify some behavior, eh?

The "buy local" movement is a huge debate. I probably ruffled some feathers awhile back when I asked for my ownership share of our local food co-op back (I can shop there without it anyway. I'm not exactly a volume customer.) This is because I find it more rewarding to go to the farmer's market booths where I know people, or roadside stands to be my veg. I am also a Costco shopper -- where organic fruits and veg can be bought in abundance. Is a lot of it trucked in? You bet. But so is the stuff at my local food co-op. Sadly, if you look at usage of floor space, most of what makes the place "go" is its sales of branded, packaged foods. These brands are sold at Walmart, Costco, and other conventional grocers for less. In this battle, I usually choose our local conventional grocer, followed by Costco.

This brings me to my final point -- how do you define "local" and is "local" always better? The conventional grocery store chain I support is an Iowa-based company. It is a low-frills operation, which stocks a lot of Iowa product and can get you about anything. It supports the communities in which it operates. The stores are very clean and they are (by all accounts) a good employer. To me, that accomplishes enough.

It really can get tricky. Like when a local product is in a national chain, or vice versa.

I'd like, personally, to just start thinking about what total costs might be hiding behind the price tag or ingredient list.

The bit about infrastructure is a neat example. New technology (e.g. - plug in electric) that is ultimately good for the environment, might allow a heavy user of the road to not pay in to the system at all. The wear and tear on the infrastructure caused by hybrids or electric cars might be disproportionately paid for by others.

Thought provoking post as usual. I think most of us don't think about the hidden costs of the things we buy. I think this is a point that MMM likes to make too. Not only is consumerism bad because of the money wasted but also the other hidden costs to the environment, costs to our health, workers, etc. This made me think of something I read that the president of Uruguay said recently:“We’ve been talking all afternoon about sustainable development. To get the masses out of poverty. But what are we thinking? Do we want the model of development and consumption of the rich countries? I ask you now: what would happen to this planet if Indians would have the same proportion of cars per household than Germans? How much oxygen would we have left?“Does this planet have enough resources so seven or eight billion can have the same level of consumption and waste that today is seen in rich societies? It is this level of hyper-consumption that is harming our planet.”Mujica accuses most world leaders of having a “blind obsession to achieve growth with consumption, as if the contrary would mean the end of the world”.

Would the economy come to a grinding halt if we stopping buying "stuff"? I don't know about that. Plus we are always going to need to buy some things as they get used up and/or worn out. Buy by and large, the average person doesn't need to buy nearly as much stuff, or as often, as they do.

I don't think the answer is not buying stuff, either. I think it's more about paying more for stuff, instead of buying cheap crap. Buy local products if you can. Buy domestic if you can afford to, and make it a priority to be able to afford to. By and large my logic (but no research) tells me that this would cut back on pollution, feed less money to overseas sweat shops, and support those in our local communities. Can we avoid externalities each and every time? No. But we can be more conscious conusmers. We can make a positive (or at least less negative) impact by watching where we spend our dollars. As opposed to watching how many of them we spend and just saying, 'Screw the world. This is convenient for me.'

This is all said by a total hypocrite. I do try to do this wherever I can, but I can't say I'm fully conscious of every purchase I'm making. It's something I want to get better at for sure, so thank you for the yet again beautifully written reminder.

Also, I swear I'm not xenophobic. Haha. Maybe I know too many people that make clothing on a small scale. And I just figure buying stuff domestically means less trans-oceanic transportation and carbon emissions. And I'm all about supporting foreign countries, but I don't think that a lot of the countries that our goods are produced in support the average worker. So I'd rather support the guy across the city who just opened up his own thrift store.

Sorry about that xenophobic comment. I have a love/hate relationship with the buy local movement.

I come from a line of mobile people so the "us first/here first" mentality never rang true for me.

Jim Russell, who writes the excellent Burgh Diaspora and at Pacific Mag, has changed my thinking over the years on the subject. Being focused on place (focus our city, our state, our country) is short sighted. As he always says, people develop...not places.

Yeah, I don't care if the person selling me goods here in the Burgh has been here since the French and Indian War or is an immigrant who just arrived here from Syria. Their proximity to me is what matters logistically. Prior to moving back here I was pretty mobile myself, having grown up in a mobile family that just happened to land in Pittsburgh the longest. All the places I've lived I've tried to frequent local businesses, especially those that produce their own goods. It's not so much to me about civic pride (though I do enjoy supporting those around me regardless of where I am...long term it's going to be Pittsburgh but purely for family reasons,) but more about actually cutting down on that pollution, spending more money on quality, etc. As I said, I'm a hypocrite as I do buy stuff on Amazon from time to time. And shop other places I know I shouldn't for convenience. But when I can afford to, I try to do things locally not because I hate everyone else, but because it's amazing what I can source without having something shipped from half way around the world, most likely being so cheap because the labor was inequitably paid for, or because the manufacturing standards are so low that the product is going to give me cancer.

This is so true and it's something you don't really think about in your daily life when you are making purchases. There's a reason that the shirt you are buying is only $5 at certain stores. Obviously that's not saying you have to go all out and pay $500 just for a brand name but there's definitely an in between.

I think the problem is that it takes a lot of research to really know what you are buying. Most consumers do not have the time for that, and I'm sure companies don't want to advertise if they are paying someone $1/hour to make your shoes.I guess the thing to do is try to be more conscious in your purchasing where you can, and hope that promotes change across the board - even if it is slowly.

I've had a post on my To Do list for awhile, with the working title, "Why we spend more than we need to"

For example, we spend 2x or more to buy fair trade shade grown coffee and fair trade chocolate. In Seattle, we bought most of our food from local organic farmers.

We also don't buy things that aren't aligned with our values. You don't see us driving much (no gasoline), we don't have any diamonds, and there is a noticeable absence of ivory in our backpacks.

This all becomes for naught though, when you consider that one trip on an airplane generates more carbon than everything from a whole year of the rest of our life combined

There is a good book, How Bad Are Bananas?, that looks at the carbon footprint of everything. Of course carbon footprint is only one measure of environmental impact, and doesn't say anything about quality of life of labor, etc... But it turns out bananas are not so bad. And anything shipped by boat is pretty low impact

Another interesting topic with the idea of place is the current immigration policies of the US. Why does this generation of the descendants of immigrants have more right to the land/job opportunities of this country than the descendants of immigrants that settled a few hundred miles south? It is interesting to see people with blonde hair and blue eyes picketing the US/Mexico border and protesting immigration

Thanks for the really kind words, Jeremy! That means a lot coming from you, and look forward to your post on spending more than is technically needed.

I remember reading something similar about an airplane's carbon emissions in No Impact Man, I think. It puts things in perspective. And I'm eating a banana right now for breakfast, so maybe that evens things out a bit. ;)

Good point about immigration, and one that we likely see eye to eye on. I feel lucky to have a parent who immigrated here and has given me her perspective on what it means to be here.

The flip side of that view is exactly the sort of thing I hate about place-centric thinking. This is my country, not yours. I care about this side of the border, not that one. Buy local.

Disclaimer: This blog is written for entertainment purposes only: not to give advice. I'm just some dude on the internet, and one without a whole lot of credentials. It's a good idea to consult with professional before making investment, tax, or financial decisions.